SWIFT SALE OF OIL FROM U.S. STOCKPILE IS LIKELY IN THE EVENT OF GULF WAR

By Thomas W. LippmanJanuary 2, 1991

If shooting starts in the Persian Gulf, here is a partial list of things the federal government will not do to keep oil and gasoline flowing and hold prices down:

Allocate supplies.

Impose price controls.

Ration fuel.

Close the New York Mercantile Exchange, the commodity market where futures brokers are expected to bid the price through the roof if war comes.

What the government is likely to do is sell oil from the Strategic Petroleum Reserve, a 585 million-barrel emergency stockpile owned by the Energy Department and stored in salt caverns along the Louisiana-Texas border.

Energy Secretary James D. Watkins has said he will ask President Bush to order an immediate sale of oil from the stockpile if the United States goes to war with Iraq. Such an order would have little immediate impact on the oil supply because it would take several days, at least, to receive and evaluate bids for the oil. But it might have a calming effect on oil markets that are otherwise likely to be thrown into a frenzy by the possibility of disruption of Persian Gulf supplies.

Aside from activating the oil stockpile, the federal government apparently will have little or no part to play in managing the oil market if war comes. The government does not have -- and the Bush administration does not want -- authority to allocate fuel supplies, control prices or impose rationing.

The Defense Production Act of 1950, which gave the government power to decide who would have priority in acquiring fuel, expired in October. Laws that authorized rationing and price controls expired early in the Reagan administration.

"I'm not sure it's a power we would have exercised" if laws were still on the books, said John J. Easton Jr., assistant energy secretary for energy emergencies. In a free market, he said, the Energy Department's role is to "put out the right information to the public," hoping consumers respond calmly, avoiding hoarding and panic purchases.

According to Watkins, Easton and oil industry experts, there is no shortage of crude oil or petroleum products and a war in Kuwait should not create one. The oil fields of Saudi Arabia and the Persian Gulf shipping lanes are well defended by U.S. and allied forces, so the oil should keep flowing.

"I would hope players in the oil market would keep their hats on if hostilities develop," Watkins said after a visit to Saudi Arabia last month. "We are not getting any oil from Kuwait or Iraq now. That will not change if hostilities begin."

"We think jawboning can be effective," Easton said. "Remember that oil kept flowing {from Saudi Arabia} after Aug. 2," the day Iraq invaded Kuwait, "when there was a direct threat. And tankers kept sailing during the 'tanker war' " between Iran and Iraq in the 1980s, "when it was much more dangerous."

Assurances from the Energy Department, however, may not be enough to prevent panic among consumers and among traders in the New York futures market, who can bid up prices within seconds if they think a shortage is likely.

"You'll have immediate fill-ups by all motorists, heating-oil customers will demand oil that day, and politicians will take to the microphones that night to demand allocations and price controls," one oil industry executive predicted.

The New York Mercantile Exchange, the world's principal forum for setting oil prices, changed its rules last month to provide for a suspension of trading if the price rises or falls by more than $7.50 a barrel -- nearly 50 percent more than the greatest one-day price swing ever recorded.

In the event of war, said exchange president R. Patrick Thompson, "We would open within an hour of normal time and allow the market to seek its own level. Nobody knows what's going to happen." If the $7.50 limit is reached, he said, trading would be suspended, then resume after an hour.

Because the New York price can affect consumers virtually overnight, some critics of the exchange have urged that it be closed to abort price surges in an emergency. But Easton said that "our people have looked carefully at it. There's no inclination to close it" -- especially because that is where any response to the Energy Department's calming message would show, in the form of price moderation.

While the federal government has no power or inclination to intervene in the fuel market, at least 30 states have the power. Some oil company executives have expressed fear that individual governors will invoke their authority to allocate supplies, but Easton said "those fears are more hypothetical than real" because supplies are adequate.

He said his office is in "daily contact" with the National Association of State Energy Officials to ensure that the governors have accurate information.